Bed Bath & Beyond Inc. (BBBY) CEO Mark Tritton on Q3 2021 Results - Earnings Call Transcript

Cyxtera Technologies, Inc. (NASDAQ:CYXT) Q1 2022 Earnings Conference Call May 12, 2022 8:30 AM ET

Company Participants

Kwang Edeker – Senior Director of Finance at Cyxtera

Nelson Fonseca – President and CEO

Carlos Sagasta – CFO

Conference Call Participants

Jonathan Atkin – RBC Capital

Sami Badri – Credit Suisse

Frank Louthan – Raymond James

Michael Rollins – Citi

Michael Elias – Cowen

Operator

Hello, everyone, and a warm welcome to the Cyxtera First Quarter 2022 Earnings Call. My name is Bethany, and I’ll be your operator today. [Operator Instructions]

I will now hand the floor over to Kwang Edeker, Senior Director of Finance at Cyxtera. Kwang, over to you.

Kwang Edeker

Thank you, Bethany. Good morning, and welcome to our first quarter 2022 earnings conference call. On today’s call, we will refer to materials available on our Investor Relations website at ir.cyxtera.com.

We are joined here today by Nelson Fonseca, President and CEO; and Carlos Sagasta, our CFO. After prepared remarks, we’ll open up the lines for Q&A.

Before we begin, I would like to remind you that today’s earnings materials contain forward-looking statements, including statements regarding our future expectations. All forward-looking statements are subject to risks and uncertainties. Please refer to today’s earnings materials, the safe harbor language on Slide 2 of our presentation and our SEC filings for a discussion of the major risk factors that could cause actual results to differ from those in our forward-looking statements. In addition, we use several non-GAAP measures when presenting our financial results. We have included the reconciliations to these measures in our supplemental financial information.

With that, I’ll turn the call to Nelson.

Nelson Fonseca

Thank you, Kwang. Good morning, and thank you for joining us for our first quarter earnings call.

We’re pleased to report another strong quarter of results to kick off 2022, delivering solid growth and continuing our momentum from 2021. Our first quarter performance, once again, underscores the consistent execution from our team as we continue to leverage the robust customer and partner ecosystem we have built across our global platform.

Our team delivered strong core bookings for the quarter totaling $25.7 million in annualized revenue with average monthly core churn in the first quarter of 1%, which is flat to the same period last year.

This combination of strong bookings and churn performance resulted in core revenue of $165.9 million and transaction adjusted EBITDA of $58.6 million representing year-over-year growth of 6.2% and 4.5%, respectively.

During the quarter, we remain focused on executing on our business plan and delivering on the commitments we made to our customers, employees, partners and shareholders. In addition, we continue to prioritize growth opportunities continued innovation, ESG and the further strengthening of our capital structure.

From a growth perspective, we attracted 43 new logos to our platform, demonstrating the strength of our differentiated go-to-market strategy. New logo acquisition for the quarter increased 34% on a year-over-year basis, driven by the new logo focus of our channel partner program. The focus on attracting new logos drove an 18% increase in overall channel bookings when compared to the same period the prior year.

In addition, we are continuously looking for opportunities to expand our global footprint and deliver innovative solutions to our customers in new markets. To that end, we’re excited to expand into India through our strategic partnership with Sify Technologies. Sify, which is one of the leading digital ICT solutions providers in India operates carrier-neutral data centers across various markets in the country. Sify shares Cyxtera’s focus on delivering leading edge infrastructure solutions required for enterprises digital transformation initiatives to drive growth in their businesses.

Similar to Cyxtera, Sify delivers their solutions from world-class data centers that feature robust interconnection offerings and rich ecosystems of partners. Cyxtera will now be able to provide colocation services to our customers in five additional markets including Mumbai, in one of the most important and fastest-growing global economies. Additionally, Sify will resell our future suite of solutions across our footprint in North America, Europe, Asia Pacific to more than its 10,000 customers.

We will continue to consider expansion into new markets and evaluate acquisition opportunities. Our focus will be on the opportunities that are accretive to our plan with a disciplined approach to capital allocation decisions.

Along with looking at potential options to expand our global footprint, we continue to drive innovation through our in-house team to into our solutions are delivering increasing value to our customers. For us, building leading-edge technology solutions that enable customers to leverage digital infrastructure to grow their business, both today and into the future is one of the key differentiators that sets us apart from our peers.

We continue to make progress in this area with the unveiling of Cyxtera Labs, a program that offers support and resources to accelerate our customers’ innovations to market. The program is designed to support both start-ups and large enterprises with research and development projects by offering cost-effective consumption-based solutions without compromising performance, control or scale.

The program builds off the power of our digital exchange to help customers connect to raw infrastructure in the form of our enterprise bare metal and SmartCabs solutions. We’re excited to have launched Cyxtera Labs in the first quarter and look forward to supporting a broad range of customers through this initiative.

As I mentioned last quarter, we have developed a holistic ESG approach that prioritizes the needs of each of our stakeholders, including our customers, employees, shareholders, partners, the environment and society as a whole. To ensure we continue to make meaningful progress across all areas, Cyxtera has prioritized ESG initiatives at the Board level and establish multiple levels of oversight across the organization. We are proud to join the leading hyperscalers and more than 30 colocation data center providers as partners in the infrastructure Masons Climate Accord.

The iMasons Climate Accord is a cooperative of over 70 companies to reduce carbon and digital infrastructure materials, products and power. We’re committed to being good stewards of the environment and continuing to support initiatives like the iMason’s climate accord that seek to bring together industry leaders to drive meaningful positive guidance for how our sector can effectively reduce carbon while efficiently operating our facilities to provide the services our customers require.

Lastly, we continue to make progress on strengthening our balance sheet and optimizing our capital structure during the first quarter. Carlos will provide additional color during his section. In summary, we are pleased to deliver strong financial results for the first quarter, highlighted by continued growth in core revenue and EBITDA. We are excited about the opportunities ahead of us and look to leverage our differentiated global platform, strong ecosystem and innovative solutions to drive accelerated growth, increase profitability and attractive returns on capital.

Now I’ll turn the call over to Carlos to cover the financial results in more detail.

Carlos Sagasta

Thank you, Nelson. Good morning, everyone, and thank you for joining us first quarter 2022 earnings call.

We’re pleased to report today a strong start to 2022 with the release of our first quarter performance. Despite some of the macro volatility that we have seen during the quarter as a result of geopolitical and macro pressures, the business continues to perform in line with expectations. The industry tailwinds remain strong and are supportive of our connection rich differentiated offer.

As we will discuss later, energy continues to be the most salient example of this facility alongside supply chain issues. I will speak to energy later, but in regards supply chain, we continue to see pressure, mostly lead times but also modestly in cost. Our abundant available capacity acts as a good mitigator to this risk alongside great planning and dynamic execution from our engineering and data center operation teams.

Our balance sheet has continued to strengthen during the quarter with our warrant redemption complete and the exercise of the forward purchase agreement, which added $75 million to our balance sheet. As we stated in our most recent call, we believe these transactions provide clarity and strength to our capital structure. Now let’s go a little bit deeper into the financials now.

Turning to Slide 9. Total revenue for the quarter increased by $9.5 million or 5.5% year-over-year to $182.4 million, while recurring revenue increased by $9 million or 5.5% year-over-year to $173.7 million on the back of great customer engagement and strong overall demand. Our scale, highly connected environment, ease of consumption and innovative products continue to attract new customers and enhance the robust ecosystem we have built across the Cyxtera platform. With that in mind, Q1 interconnection revenue represented 11% of our total revenue for the quarter and grew 1% year-over-year.

Core revenue, as shown on Slide 10, which excludes Lumen revenue, increased by $9.7 million or 6.2% year-over-year to $165.9 million. Gross margin was 46.3%, a year-over-year increase of 317 basis points, primarily attributable to increased revenue, more efficient installation costs some lower expense related to timing differences and less rate expense, all of which was offset by higher utility costs. Energy costs continue to be a key focus for Cyxtera, the same way we are hearing from other players in the industry.

As we discussed last quarter, we have the contractual flexibility to pass through increases in power costs. But we consider power passthrough activity very carefully because we understand that this is a real impact to our customers. So far, this process has been broadly constructive, and we remain confident it is the right approach in the long term, even if we have some temporary carrying differences between cost and revenue recognition.

Transaction adjusted EBITDA increased by $2.5 million or 4.5% year-over-year to $58.6 million, principally due to higher revenue. And in spite of higher SG&A costs, driven by higher public company costs and enhanced go-to-market efforts. Transaction adjusted EBITDA margin of 32.1% declined by approximately 31 basis points year-over-year.

Transaction adjusted EBITDA increased by $3.3 million or 4.6% year-over-year to $74.3 million, which equates to a margin of 40.7%. As a reminder, we view transaction adjusted EBITDA as the best metric for comparing our performance to our peers because it adjusts for our asset ownership structure. Average monthly core churn of 1% for the first quarter was flat to the same period last year.

Despite the sequential increase from Q4, we’re within our expected rate. Although net bookings were healthy in Q1, we did see a decrease in occupancy of 90 basis points. This decrease is broadly attributable to incremental capacity becoming available, roughly 60 basis points, and a late quarter churn event, which we expected to — which we expect to replace in short order. Despite the sequential drop, occupancy has expanded by 320 basis points year-over-year across our stabilized markets.

As detailed on Slide 13, core MRR, including FX, increased by $1.1 million to $49.8 million, driven by net installations. Our MRR per cabinet increased 2.4% as contracted ramps started to flow through the calculation.

On Slide 16, we have provided a breakdown of our capital investments. Overall CapEx is up on the back of our higher expansion activity around key markets and a more normalized maintenance CapEx levels versus Q1 in 2021, which had a lower number due to timing of project execution.

Now turning to Slide 17 for an update on the balance sheet and capital markets activity. We continue to make good progress on the deleveraging journey. During Q1, our financial net leverage was 3.6 times, two full turns lower than a year ago, at 200 basis points lower than Q4 2021.

On a lease-adjusted basis at 6.1 times, it’s 1.5 times lower than the same quarter last year. As it relates to our capital structure and future financing opportunities, we believe we have ample runway ahead of us with our term loan maturing in 2024. We continue to evaluate all financing alternatives to support our business model and growth plans in the future.

While we are not under any pressure to address any financing needs in the near term, it has always been our philosophy to get ahead of [indiscernible] in a thoughtful and family manner. And with that, thank you all for your continued support and for joining us today to discuss our first quarter results.

Operator, please open the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Jonathan Atkin at RBC Capital. Jonathan, please go ahead.

Jonathan Atkin

Yes, thanks for taking the question. Just wondering if you can give us an update on regional trends and maybe trends by vertical or by product? Maybe just give us a little bit more sense of commercial momentum. So it was a particular metros products, any particular sweet spots you’re seeing in terms of your offer, whether it’s bare metal or particular types of color offerings and — or kind of end user verticals where use cases are seeing particular momentum? Thanks.

Nelson Fonseca

Thank you, Jonathan. So look, our solution is really not vertically focused. So we have a capability — our Bare Metal, our global platform, is really horizontal in nature. We can support and we do support customers from across every vertical. I think that one of the two verticals that are being very important for us as we continue to grow our Bare Metal offering and digital exchange is artificial intelligence, machine learning. A number of customers that are coming to us because of the ease to use our data center and our infrastructure.

So those are — that’s an area that’s been very good for us. I mentioned our Cyxtera Lab and some of the start-ups that are really looking for raw infrastructure as they launch. And so — those are two areas that we’ve seen some nice logo wins and some additional momentum. But truthfully, the demand is strong across all the verticals. And frankly, across all the regions as well. So we’re not seeing any sort of overperformance in any one vertical or any one region across the footprint.

Jonathan Atkin

And then Sify does a lot of network services, they even kind of flex up into hosting and they’re kind of systems integration type work as well as offering pure color. So I’m just interested in, was it more the national footprint that attracted them as a partner, but maybe talk to us a little bit about what led to that partnership and then the type of criteria that you might apply to similar partnerships elsewhere.

Nelson Fonseca

Well, I think India is a market that we’ve always been interested in. It’s a market where we get a lot of inquiries from our customers. And we have 2,300 customers, they’re all growing. And we want to be able to support their growth needs. So this was a region that we felt we needed the solution. We know the folks at Sify, we think they do a great job. Yes, they do some additional things in — besides coal, but the data centers are really carryout from that perspective. It’s got a great footprint with those five locations within the country. So I think it’s the first step of a broader relationship and broader activity for us in India.

And as far as what kind of model we’ll use as we look to expand in other regions, we’re always going to look at the best model for any given market, right? I think one of the benefits of our global platform and our approach is there’s different ways for us to expand into new markets. This was what we thought the best path, with a great partner in India. But as we look at other markets and other regions, we may decide to do a different approach. We could buy or build, we could do a number of different things.

But for India, we thought this was the right approach at the right time we can meet some of the demand that we have from our customers and then we can take a long-term view of the partnership.

Jonathan Atkin

And then lastly, I wondered if you can just give us an update on where you stand now and if there’s any types of goals you have with respect to asset ownership. I think one thing that makes your company a little bit different is that you use a lot of partner data center sites — don’t necessarily have the degree of asset ownership that the traditional data center REIT have or even a switch has. And how would you kind of characterize that mix now within your own footprint, leased versus owned? And then any steps or strategy around changing that or any desire to change that? Thank you.

Nelson Fonseca

Yes, we always start with — everything we do here at Cyxtera is from the customer lens, from the customer perspective. Our view, and I think our strong bookings and churn performance reflects that is that our customers are not worried about the ownership or lack of ownership of a data center. They want to make sure we have control of ingress and egress and networking and security, and we have that at our data centers.

So from a customer perspective, it really doesn’t matter. It doesn’t slow us down. Our asset-light model is a little bit different to some of the others in the industry. It does give us some flexibility in terms of how we expand. But we’re not opposed to owning data centers either, right? And so as we think about — we haven’t set a goal, a target to say we need to be at x ownership percentage by a certain date. Again, we’re very customer focused. But as we find opportunities in an opportunistic fashion to increase section, whether that’s through acquisition, we will look at that, Jonathan, but we don’t have a set target in terms of increasing ownership as a percentage of all our facilities.

Operator

The next question comes from Sami Badri at Credit Suisse. Sami, please go ahead.

Sami Badri

I only have one question and then one follow-up. Could you characterize the pricing environment for the market right now for your open space? Are you seeing an opportunity to see better pricing on a per cabinet basis that you saw about three months ago. Can you just characterize what you guys plan on seeing or what you’re mobilizing for from a pricing perspective?

Nelson Fonseca

Thanks, Sami. Look, pricing for us has been stable to up, and it remains that way. And I think we’ve been pretty clear that we price at the market level, right, across all of the number of markets that we are across the globe. So to the extent that we see opportunities to increase price, we’re taking advantage of those opportunities.

But again, we’re always going to peg our pricing to the market. And right now, we see it as stable. And we do see it up in certain markets, and we’ll continue to monitor that trend. And obviously, if there’s a way for us to increase prices, we’re going to definitely take advantage of that opportunity. But stable to up is the way I would describe it in summary.

Sami Badri

But maybe to be a little bit more specific, just so we can understand magnitude here, would you say that because of supply chain dynamics — I’m just clearing what’s going on, that you can take price a lot more in this specific environment versus just, say, three months ago when things didn’t seem as tight?

Nelson Fonseca

Well, I do think there’s pricing opportunity, Sami, I do want to kind of mention we are — from a retail perspective, we have customers that are in multiple markets that grow is across the globe. So we are seen the ability to price a little bit higher. We’re being cognizant and thoughtful about that as these are the same customers that are growing with us into new markets, hopefully like India. And so we want to take a long-term customer relationship approach to how we push pricing. But yes, the dynamics are favorable for pricing.

And keep in mind that we’ve had available capacity, that’s one of the differences in our platform. And so we’ve been able to take advantage of really driving bookings with the available capacity that we have across the footprint. And so — again, stable to up, and we’ll take advantage of the opportunities that we have in any given negotiation.

Sami Badri

Got it. Thank you. One — the follow-up question that I wanted to come in with was how do you balance your margin targets relative to not passing on too much power costs to your customers? Now how would you describe the strategy of the company in this specific situation as it to kind of take more market share and watch how much you pass over to your customers? Or is it you’re trying to pass on as much as you possibly can in a very efficient and considerable way just to maintain operations and ongoing activity with the customers?

Nelson Fonseca

Sami, I think those are kind of the two ends of the spectrum. What I would say is, one, we have the ability to pass through power costs, and we are passing through power costs. And so margin is very important to us. The dynamics in the market are real. And so as our costs increase, we will be passing those costs on to the customer. That being said, we want to be thoughtful about how we do that, the timing of that.

And so if there’s lags in us passing those costs on, in some cases, that’s a lag or a timing issue is an — it’s an acceptable factor in certain cases. But margin is important, and we will be passing on the costs that are elevated or that we’re incurring as a business. Carlos, I don’t know if there’s anything that you want to add there?

Carlos Sagasta

Yes. I think Nelson said it, but I will just reiterate it is put ourselves in the shoes of the customer, right? So — for us, it might be a cost recovery exercise, but for the customer is real cost increase. And we don’t want to generate a situation where the customer rethinks their strategy with us because of that, right? So we’re trying to hit a balance in which we will get back to where we need to be over a period of time, that would be digestable for the customer. But eventually, the question is not how much because we pass it all, is over what period of time.

Nelson Fonseca

Correct.

Operator

Next question comes from Frank Louthan at Raymond James. Frank, please go ahead.

Frank Louthan

Great. Thank you. Walk us through the potential opportunity here with the Sify deal? Any sort of revenue potential there? And is there any CapEx commitments or anything like that on your end? And then maybe give us an update on what the status is with business in Singapore. That market has opened up a little bit. How should we think about that opportunity going forward?

Nelson Fonseca

So let’s, Frank, address Sify first. Right now, very modest CapEx as we deploy some of our capabilities in Sify. But I think it’s the first step of many. Again, we feel like there’s significant demand for India in and within our customer base. And this is the first step for us to capture and capitalize on that demand before we make potentially a bigger investment in the area. So I would consider it a first step of a more strategic vision for the region, but very limited CapEx at this point. Carlos, I don’t know if there’s anything that you want to add there?

Carlos Sagasta

No. At this point, it’s super light. Yes.

Nelson Fonseca

From a Singapore perspective, great market. This is obviously one of the

markets back to some of the pricing questions that are out there that we’ve been able to take advantage of strong pricing dynamics in Singapore. But again, great demand and great pipeline for that market. We’d love to get additional capacity in that market. We’re looking at different options for us in region, but demand is very strong there from our customer base and good pricing dynamics as well.

Operator

[Operator Instructions] Next question comes from Michael Rollins of Citi. Michael, please go ahead.

Michael Rollins

Thank you, good morning. A couple of questions, if I could. The first, I think you mentioned earlier in the prepared comments that interconnection growth was 1% during quarter. Can you impact what you’re seeing on the interconnection side? How the network densities are trending in your portfolio? And how that interconnection should grow over the longer term? And then just secondly, as you think about enhancing your business plan and the opportunities in front of you, how are you thinking about the merits of being a public company in that context versus other options that you might be considering structurally for the company? Thank you.

Nelson Fonseca

Mike. So — first, let’s tackle the interconnection. Interconnection revenue is growing. Our customers are using more cross-connects and our digital exchange adoption is increasing nicely. We have more customers on the digital exchange and they’re continuing to get more and more services from us.

We did see, although an increase a smaller increase year-over-year from an interconnect revenue perspective. But — look, cross-connects and ports are a little bit about timing as well. We’ve had some great bookings and some good customer wins. As they deploy and those customers ramp, I think some of that interconnection will catch up. But I think we’re seeing great strength in our interconnection portfolio, and I really don’t see that slowing down.

And so I think we’re still on track for some of the remarks we made in the past about where our interconnection as a percentage of revenue should be going forward. From a financing perspective, and we’re happy to be a public company. We’re performing well. And from a financing perspective, I think Carlos addressed that in his prepared remarks. Carlos, I don’t know if there’s anything that you want to add in terms of financing and what we’re looking at here short order.

Carlos Sagasta

No. But I think going to Michael’s question, we’re happy to be a public company. We think being a public company opens for us a wider pool of potential capital sources. And so we think we are where we need to be.

Operator

The next question comes from Michael Elias at Cowen. Michael, please go ahead.

Michael Elias

Great. Thanks for taking the questions. I have a question and then one follow-up. So it seems like the enterprise demand environment has accelerated pretty meaningfully over the last months. Just curious, coming off this leasing quarter, how would you describe the go-forward leasing pipeline and how that compares to what you’re seeing this time last year?

Nelson Fonseca

Look, Michael, I think for us, we take a snapshot of the pipeline at the beginning of every quarter, but we obviously had a strong bookings quarter in the first quarter. We see the pipeline again as similar to pricing is stable to up, right? The pipeline is growing, but from existing customers and also new logos, which we do focus a lot on new logos. We know we deliver good service and customers get value out of our offerings. So we know as we bring new customers into the fold, they’re going to grow with us within a data center and throughout the platform. So demand is strong and our pipeline reflects that.

Michael Elias

Great. And I guess for my follow-up question, you talked earlier about pricing and how it’s stable to up, but how to think of it? Now input costs are up, labor costs are up, power costs are up. What I’m trying to understand here is your peers have talked about increasing pricing materially for their new list prices. And some of them are taking the opportunity to drive higher yields. And I guess my question for you is, how do you think about the opportunity to push pricing here higher? And if you don’t do that, what does that essentially imply for the margin picture?

Nelson Fonseca

Two things — and Carlos, feel free to chime in. I think one, as I mentioned, we price at the market level. So as the market pricing goes up, our pricing is going to increase with that, and we do see pricing going up. We’re thoughtful about raising prices because we take a long-term view of the business, but we will not be selling at any sort of discount to the market. That’s never in our approach, and we always price right at that market level.

So that will continue. I’ll mention again, because we have available capacity across the footprint, that input cost in terms of construction maybe affects us a little bit different than our peers that are building more capacity obviously, as we continue to drive up utilization that will affect us in similar ways.

So those are the two views, but we will continue to price the market. We are seeing market pricing go up, and we’re going to adjust accordingly. But we’re going to be thoughtful about. Carlos, anything that you want to add there?

Carlos Sagasta

I would just reiterate what you just said, which is we price at the market. And as the market goes up, we’ll go up with it, right? I think Singapore and the increasing capacity that we’re seeing there is a great example. And with capacities at a premium, markets going up, we’ll follow the market.

Nelson Fonseca

And we’ve seen it.

Operator

We have no further questions. So I’ll hand back to Nelson and Carlos and Kwang for any closing remarks.

Kwang Edeker

All right. Well, thank you, everyone, for spending some time with us this morning. We appreciate all the questions in the dialogue and look forward to updating you all next quarter. Thank you.

Operator

This concludes the Cyxtera first quarter 2022 earnings call. Thank you for joining us. You may now disconnect your lines.

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